MARKETS SPECTATOR: Mining mount doom

Analysts have been quick to forecast a slump in prices and earnings for miners. Are their fears overblown?

Last week analysts rushed to stick a knife into the miners in the wake of the collapse in the gold price that pole-axed many base metal prices.

Credit Suisse says the period of rapid Chinese growth has ended. The group, which predicted the pricking of the gold bubble, says that even last week's abrupt fall in the metal's price had even caught it by surprise. And Citigroup says in the wake of the drop in commodity prices it is in the process of downgrading “short and medium term” mining company earnings by 5 per cent in 2013, 15 per cent in 2014 and 14 per cent for 2015.’

But in the rush to throw the miners onto the stock recommendation equivalent of mythical Mount Doom, have analysts drawn conclusions that in some cases overreach?  Atlas managing director Ken Brinsden told Business Spectator last week his Chinese buyers, who account for almost all the purchases of his company’s iron ore, believe the market is ‘undersupplied.’ Moreover, Atlas and iron ore rival Fortescue Metals Group have costs of production that are $US50 a tonne or lower. This gives them healthy profit margins with the index iron ore price steady at about $US136 a tonne. Morgan Stanley reckons Fortescue’s stock appears “mispriced.”

The rate Fortescue and Rio Tinto are digging iron ore out of the ground is higher than some had forecast. That may indicate iron ore demand remains strong. Rio Tinto last week said its Pilbara iron ore production is running at “full capacity” at an annual rate of 237 million tonnes. BHP Billiton Ltd. And it last week reiterated its iron ore production forecast for the 12 months to June 30 at 183 million tonnes. Meanwhile, Rio Tinto says it is “on track” to ramp up production to 290 million tonnes by the third quarter this year. In the first quarter this year Rio Tinto’s share of global iron ore production was 48 million tonnes compared with total global production of 61 million tonnes, a 79 per cent global market share.

But the mythical orc for Australian iron ore producers is Vale. Last week Reuters reported that one of Vale’s dry bulk ships, the world’s biggest, berthed a vessel in China. Vale may have successfully broken a ban on 400,000 deadweight tonne ships docking in China that was imposed in January 2012. If Vale can get other Chinese ports to accept its vessels then renewed Brazilian competition for Rio Tinto, Atlas, Fortescue and BHP in China may crimp their iron ore sales.

Still, the Baltic Dry Index at 885 on April 18 indicates the cost of hiring a dry bulk vessel remains at about $US5,000 a day, compared with about $US300,000 in 2008 during the peak of the ‘mining boom.’ It is cheaper for Rio Tinto and BHP to ship their iron ore by hiring ships than having a multi million-dollar fleet such as Vale’s, which is weighing on the Brazilian company’s balance sheet.